May 16, 2012

Telecom Contracts: Dodging the Potholes

Have you ever read your telecom contract? Did you understand it? Does it seem fair and balanced? If you answered "no" to any of these questions, you might have unwittingly opened your company up to some big contract problems.

Contract terms and conditions for payment and commitments are riddled with potholes for the enterprise. Let the buyer beware, for the agreements are typically biased toward the vendor.

Contract Fairness

UCTNMay14-ART.jpgContract fairness was one of the major topics presented last week at the Center for Communications Management Information (CCMI) Telecom Negotiation Conference in Washington, D.C. Hank Levine, founding partner in the communications and technology law firm Levine, Blaszak, Block & Boothby, LLP (LB3), revealed a series of "gotchas" that can be mitigated by judicious negotiations with the telecom carrier.

Levine's starting point was this equation: Good RFP + Bad Contract = Bad Deal

While a good request for proposal (RFP) can spell out what the enterprise wants, said Levine, it in no way guarantees that what is requested is what will be delivered. And, once the price is set, negotiations are not necessarily finished.

A carrier will commonly offer short standard contract forms regardless of what the RFP specifies. This is usually very unfavorable to the enterprise. Rather than the verbally agreed-upon terms, the contract will include terms that the enterprise never agreed to or even knew about during the procurement process, Levine warned.

The forms will include capitalized terms ("Line" vs. "line," "Termination" vs. "termination," for example) that the vendor defines very differently from the way the enterprise might assume. So the enterprise must learn the vendor definitions, not use its own definitions, to understand the contract.

Service Guide Trumps All

All vendors use a master agreement structure. At the bottom is the service guide, which can be hundreds of pages long. Above that are the general terms and conditions. At the top are the rates, service-level agreements (SLAs) and other service-specific terms spelled out in attachments, exhibits and schedules. The enterprise negotiator needs to understand that the service guide overrides everything else. For example:

  • If the negotiated portions of the contract are silent on a given issue, then the service guide provisions will apply.

  • If a term or condition is removed from the contract but is in the service guide, the provision removal is not valid. This could apply to contract renewal or even individual circuit terms.

  • Resolving an issue in the master agreement will not end the matter if the vendor's version comes back via an attachment. This could mean that the vendor can use the enterprise's logo, trademarks, trade names and service marks in the vendor's internal and external communications - even against the enterprise's wishes.

Ensuring Rate Stability

The enterprise enters into a contract for services with the expectation rate stability during the contract term. About 80 percent of purchased services can be stabilized by:

  • Setting out the rates in the contract.

  • Ensuring rate descriptions are NOT defined as "illustrative" or "current." If these terms are used, there is no guarantee of rate stability.

  • Avoiding discounts off the service guide rates. These can be changed without the enterprise's consent and will usually increase over time.

  • In international agreements, ensuring that the vendor cannot move a customer from a low- to high-priced zone or band.

Insist on Rate Reviews

The contract should have a provision for rate reviews, with clauses that give the vendor an incentive to keep rates competitive and give the enterprise an incentive to set realistic expectations. Read the review clauses carefully, for they can be obtuse and hard to comprehend. In fact, once the complex language is removed, it is more than likely that the enterprise will have a guarantee of nothing. Something to watch out for: sometimes a contract will allow the enterprise to request an increase in commitment in return for a capped temporary rate reduction. However, a very short decision time for the commitment could be difficult for the enterprise to meet, thereby eliminating the cap.

1 Comment

As an independent consultant, we review hundreds of telecom contracts each year and have seen all kinds of bad contracts. In addition to rate reviews, here is a short list of other clauses to address:

Business downturn
Rate refresh
Equipment refresh
Technology upgrade / migration

The telecom "potholes" go beyond the contracts. What about the billing? Check out these stats:

CFO magazine reported (based on Aberdeen research) that telecom service expenses are in error at a staggering 7% to 12% of spend; a figure resulting in $8 Billion dollars a year in lost profits for Fortune 500 companies alone. Another study from Gartner found that 85% of the telecom invoices have billing errors...are in the carrier's favor.

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